OUTSOURCING SAVES MONEY.

Within the first three months of 2005, more than 112 bills to restrict "outsourcing" already had been introduced in at least 40 states, an increase over last year at the same time. Why has this trend to restrict international trade in services persisted? Are these proposed restrictions a good idea? Are they unconstitutional?

In 2004, only five anti-outsourcing bills became law. Republican governors in California, Massachusetts and Maryland vetoed anti-outsourcing bills, though outgoing New Jersey Governor Jim McGreevey issued a highly restrictive executive order to prevent state work from being performed offshore.

The reasons for the impulse to restrict offshore outsourcing are understandable, though misguided. Economic factors that created anxiety about jobs moving offshore--global competition, increased productivity, and new job creation distributed unevenly across sectors--have not changed in the past six months. In addition, as with other issues, bill sponsors may possess political motivations, such as putting members of the other party in a difficult position.

Most state bills to restrict outsourcing fall into two categories: restrictions on state contract work performed offshore and measures to limiting offshore call centers. Several state legislators also are attempting to prevent personal data from being sent outside the United States, even though federal law already permits sharing data among affiliate entities regardless of geography and provides for recourse against U.S. companies that don't take appropriate safeguards.

On the most practical level, limiting competition for state contract work increases procurement costs. This year, Colorado Senator Deanna Hanna withdrew her bill to prohibit state contract work from being performed overseas after an official budget analysis showed it would cost between $28 million and $73 million in the coming year.

In 2003, criticism erupted when a subcontractor for a call center for New Jersey state unemployment services used workers in India. The state re-worked the contract to place more individuals in New Jersey. The result? New Jersey taxpayers paid--on top of the original contract costs--an additional $900,000 for 12 jobs. "Saving" 1,400 such jobs would cost the state an extra $100 million.

Many anti-outsourcing bills are probably unconstitutional. A legal analysis for the National Foundation for American Policy performed by the law firm Alston and Bird, concluded that state contact bans "are legally suspect … since courts would likely find that such measures improperly intrude on the federal foreign affairs power and violate the U.S. Constitution's Foreign Commerce Clause." Simply put, states are not allowed to make their own trade or foreign policies.

Even if some of these bills latch on to the "market participant" theory used by some courts to allow "buy America" laws, the measures still likely place the United States in violation of its international trade obligations. The United States, along with more than 30 other nations, signed the Government Procurement Agreement, prohibiting state and federal procurement policies from discriminating on the basis of where work would be performed. The threat of trade retaliation will make it more likely that courts will follow the 2000 U.S. Supreme Court ruling in Crosby v. National Foreign Trade Council, which found unconstitutional a state law constraining Massachusetts agencies from purchasing goods and services from companies doing business with Burma.

Dartmouth Economics Professor Douglas Irwin says two aspects of trade's domestic impact are often overlooked in the outsourcing debate. "Consumers will be provided with the services they demand, at lower prices," he says. As many businesses themselves purchase services, their lower costs will result in savings that can be passed on to consumers." When a state government saves money, there is more for education, job training and tax relief.

Irwin also notes that the United States is both a major importer and exporter of services. When U.S. firms import services from India or elsewhere those dollars eventually come back to America through purchases of U.S.-made goods and services or as foreign investment in the United States.

Other economic analyses support Irwin's views. Offshore outsourcing "creates wealth for U.S. companies and consumers and therefore for the United States as a whole," concluded a 2003 report by the McKinsey Global Institute. "Offshoring" saves U.S. companies, on average, 58 cents for every dollar spent overseas, thereby increasing productivity, profitability and competitiveness.

A state that restricts international trade in any manner risks sending a negative signal to international companies looking for a place to invest in the United States. "Not welcome" signs rarely attract business. There are better ways to expand economic opportunity, including lowering the tax, regulatory and litigation burden on employers. While there may be political mileage in legislating against international trade in services, the cost to particular states and America is not worth the price.

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By Stuart Anderson

Stuart Anderson is executive director of the National Foundation for American Policy, a public policy research organization based in Arlington, Va.